Doubling the corporate income tax will harm workers

A union-sponsored group called Citizens for Fair Taxes is organizing a signature-gathering petition campaign for a November 2016 ballot initiative that would nearly double the state’s main business tax. The new money would be earmarked to state and local road projects. The proposal would increase Michigan’s Corporate Income Tax from the current rate of 6 percent to 11 percent.

This would reportedly extract some $900 million more each year from Michigan enterprises, but the costs of nearly doubling the tax-based disincentive to invest and run a business in Michigan could be much higher.

Stay Engaged

Receive our weekly emails!

email address

A Lesson from Recent Past

The proposal, if enacted, would move Michigan from having a fairly competitive business tax rate to having the second-highest nationwide.

Michigan already has a wealth of experience with the consequences of being a state with a high business tax burden. In 2007, the widely reviled Single Business Tax was replaced by an equally damaging gross receipts tax called the Michigan Business Tax (MBT). That same year, the Legislature and Gov. Jennifer Granholm imposed a 21.99-percent surtax on the new tax.

Before a reform in 2011 that made the state business tax simpler, fairer and less burdensome, the Tax Foundation ranked Michigan 49th for corporate income taxes.

The high tax rate contributed to an unfriendly business climate, and in turn, Michigan’s “lost decade” of joblessness. Within two years of the MBT’s implementation, the 2008 financial crisis and recession hit, and the state unemployment rate shot up from 7 to 12 percent.

Once the MBT was replaced in 2012 by a simpler and lower Corporate Income Tax, Michigan has performed significantly better economically. The state’s unemployment rate is down to 5.3 percent.

If all that recent history isn’t enough to make Michigan voters wary of piling on businesses, they should know that a tax increase aimed at business owners and investors could wound working families most of all. That’s because the party targeted by a tax and the one paying it are not necessarily the same.

Business tax incidence — who pays matters

A review of the extensive research and evidence prepared for a U.S. Treasury publication supports the argument that the owners of and investors in businesses subject to the proposed 11-percent tax would not be the ones who pay. The authors concluded that “labor may actually bear a substantial burden from the corporate income tax.” A National Tax Journal article suggests that in an open economy, labor bears 40 percent of the cost. Other scholars offer evidence that as much as 70 percent of the burden can fall on labor.

This record contrasts sharply with the results imagined by organizers of the petition campaign.

Let's eliminate the corporate income tax instead

Harvard economist Greg Mankiw’s research found nearly 50 percent of all tax revenues lost from eliminating the federal corporate income tax would be regained from higher business productivity. He estimates that a reduction in corporate taxes spurs nearly three times more recovered revenue than an equivalent reduction in personal income taxes.

So if Michigan totally abolished the Corporate Income Tax tomorrow, about half the $1 billion of foregone revenue would make its way into the state’s coffers indirectly from the immense growth resulting from better incentives for businesses investment.

Boston University economist Laurence J. Kotlikoff writes that the elimination of the federal corporate income tax, combined with a “somewhat” higher personal income tax, would result in a surge of capital. The U.S. capital stock would increase by 23 percent, real wages (for skilled and unskilled workers) by 12 percent and output by 8 percent. Eliminating the state corporate income tax would yield similar effects.

The bulk of the economic literature shows that of all taxes, business taxes are the most economically damaging to state prosperity. William McBride, chief economist with the Tax Foundation, reviewed 26 studies about the effect of taxes on growth. He found that hikes in the corporate tax rate were more damaging than income, consumption, or property taxes.

Instead of increasing the corporate income tax rate, Michigan legislators should consider reducing or eliminating it altogether and joining the ranks of the six states that have managed to survive without it. As the Tax Foundation put it, “The lesson is simple; a state that raises sufficient revenue without one of the major taxes [corporate, personal, or sales] will, all things being equal, out-compete those states that levy every tax in the collector’s arsenal.”

The Mackinac Center has noted in the past the top ten states with the most economic growth do not have one of those major taxes. The Mackinac Center’s Michael LaFaive writes: “We found that since 2000 (and ending in 2009), these states enjoyed average real state GDP growth of 22.4 percent while those that have all three taxes grew only 13.4 percent. Maybe that’s just coincidence — taxes aren’t the only factor that contributes to state growth and decline — but I wouldn’t want to bet on it.”

By eliminating the corporate income tax, Michigan can become a leader by boosting state GDP and most importantly, the income of all of its citizens, rather than dragging workers’ incomes down.

Addressing the Proposal

Michigan has already been through a “Lost Decade,” thanks in part to an unfriendly business climate. Increasing the Corporate Income Tax wouldn’t help the state economy, and almost surely would harm it measurably.

Gov. Rick Snyder gave his reason to oppose the measure in a recent MLive op-ed:

“[Michigan’s] reformed tax climate, like our talent, ingenuity and the famous Michigan work ethic, is one of the factors that have brought companies from around the country and around the world to locate here.”

Snyder identifies how jobs have moved back to Michigan as a result of the rollback of policies such as the Michigan Business Tax and the implementation of simpler tax codes such as the current Corporate Income Tax.

Increasing the tax rate hurts corporations and consumers alike. There are many unintended consequences that would result were voters to approve the proposal in 2016. Reverting to yesterday’s failed policies will harm the workers and families of tomorrow.

Permission to reprint this blog post in whole or in part is hereby granted,
provided that the author (or authors) and the Mackinac Center for Public Policy are properly
cited. Permission to reprint any comments below is granted only for those comments written by
Mackinac Center policy staff.